One question raised by several commenters to my post on the impossible dream of majoritarian democracy was basically “if majoritarianism is so great, how come macro stabilization policy in the UK is so bad.” The answer, as briefly glossed by Paul Krugman here and laid out in greater detail by Ed Balls in the FT is that the Bank of England is the villain. Mervyn King first persuaded David Cameron that he ought to implement an austerity regime even more severe than the one the Tories campaigned on, helped get Nick Clegg to go along with it, and then campaigned in public in favor of the Coalition’s disastrous fiscal policies.

Bad central banking puts political authorities in a very tough place. There’s an interplay between fiscal and monetary issues. The goal of stabilization policy is to stabilize the path of overall nominal spending in the economy. Fiscal policymakers can’t really push nominal spending above the path that the central bank wants it to be on. So if King says “looser fiscal policy will force me to tighten monetary policy” then you’re in a tough pickle. Some folks, à la Scott Sumner, believe that the inverse of this is also true, that monetary targets are not only necessary but sufficient. It seems to me that King, Clegg, and Cameron were all counting on this being true. Most conventional New Keynesians—including Shadow Chancellor Ed Balls, Ben Bernanke, Paul Krugman, etc.—have had their doubts about this theory and actual events in the UK seem to be reenforcing this conventional wisdom. When the goal is to increase the volume of nominal spending in the economy you don’t want the largest spender (to wit, the government) reducing spending and raising taxes.

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